GDP (Q3, First Estimate) - Capital Economics
UK Economics

GDP (Q3, First Estimate)

UK Data Response
Written by Ruth Gregory

While the burst of growth means that the economy avoided a recession in Q3, it’s pretty clear that underlying growth is soft and that the risks to our Q4 GDP forecast of 0.2% q/q are to the downside. This could mean that the Bank of England is more inclined to cut rates in the near term.

Burst of growth in Q3 doesn’t change picture of economy in limbo

  • While the burst of growth means that the economy avoided a recession in Q3, it’s pretty clear that underlying growth is soft and that the risks to our Q4 GDP forecast of 0.2% q/q are to the downside. This could mean that the Bank of England is more inclined to cut rates in the near term.
  • The GDP figures suggest that the economy failed to regain much momentum after Q2’s 0.2% q/q contraction. (See Table 1.) The 0.3% q/q rise in GDP in Q3 was lower than the consensus and the Bank of England forecasts of 0.4% and only just above the euro-zone’s 0.2% quarterly gain.
  • Meanwhile, the details of the data suggest Q3’s pace of growth won’t be sustained. Admittedly, GDP growth doesn’t appear to have been too reliant on temporary sources of support. There wasn’t much evidence of activity being brought forward ahead of the previous 31st October Brexit deadline. In fact, excluding the alignment adjustment, stockbuilding subtracted 0.4ppts from GDP. What’s more, despite no deal preparations, government consumption rose by just 0.3% q/q while business investment stagnated.
  • But the service sector ground to a halt in September. And with the economy losing pace over the course of Q3 (GDP rose by 0.3% m/m in July, but fell by 0.2% in August and 0.1% in September), this sets a weak base for growth in Q4. (See Chart 1.)
  • The only real “strength” came in household spending, which was up by 0.4% q/q – contributing 0.25ppts to GDP growth, and in net trade (excluding valuables), which added 0.9ppts. We already knew that retail sales – which accounts for around a third of consumer spending – rose by 0.6% q/q in Q3. So the 0.4% q/q rise in overall household consumption suggests that spending off the high street held up well too.
  • With the election just under five weeks’ away, clearly this isn’t the good news the government might have hoped for. And further weakness is likely to be in store in Q4. Unless Brexit uncertainty fades and a fiscal boost is forthcoming, this might make the Bank of England more inclined to cut interest rates before long.

Chart 1: Real GDP

Sources: Refinitiv, Capital Economics

Table 1: GDP by Expenditure (Components of GDP, % q/q Unless Stated)

Household Spending

Government Spending

Fix. Capital Formation

Stockbuilding (Cont. to Growth)

Domestic Demand

Imports

Exports

GDP

GDP (%y/y)

Q4 18

0.2

1.6

-0.1

0.5

0.8

2.8

0.5

0.3

1.5

Q1 19

0.3

0.8

0.9

1.3

3.3

10.3

1.6

0.6

2.1

Q2 19

0.4

1.1

-0.9

-1.9

-2.6

-13.0

-6.6

-0.2

1.3

Q3 19

0.4

0.3

-0.2

-0.4

-0.9

0.8

5.2

0.3

1.0

Sources: Refinitiv, Capital Economics


Ruth Gregory, Senior UK Economist, +44 20 7811 3913, ruth.gregory@capitaleconomics.com